How to Mint DAI/USDS Stablecoins Through MakerDAO/Sky Protocol

Learn how to mint DAI and USDS stablecoins using MakerDAO and Sky protocol, understanding over-collateralization mechanism and practical operation process.

What are MakerDAO and Sky Protocol?

MakerDAO (DAI)

MakerDAO is the most mature decentralized stablecoin protocol, issuing DAI stablecoin through over-collateralization mechanism. DAI is pegged 1:1 to the US dollar, backed by various assets (ETH, WBTC, USDC, etc.) with over-collateralization.

Sky Protocol (USDS)

Sky Protocol is an upgraded version of MakerDAO, issuing USDS (Sky USD) stablecoin. Sky Protocol uses the same over-collateralization mechanism as MakerDAO but provides a more modern interface and features.

💡 Tip: MakerDAO has been upgraded to Sky Protocol, and the same method can be used to mint USDS (Sky USD). This guide applies to both DAI and USDS minting.

Protocol Features

Key Advantages

• ✅ Mature and Stable: Most mature decentralized stablecoin protocol
• ✅ High Security: Over-collateralization mechanism, minimum collateral ratio usually 150%
• ✅ Supports Multiple Collaterals: ETH, WBTC, USDC, stETH, etc.
• ✅ Decentralized: Not dependent on a single entity
• ✅ High Transparency: All operations on-chain, verifiable
• ✅ No KYC Required: Just connect wallet to operate

Key Risks

• ⚠️ Liquidation Risk: Low collateral ratio may trigger liquidation
• ⚠️ Stability Fee: Need to pay annual stability fee (usually 1-5%)
• ⚠️ Gas Fees: Ethereum network fees may be high
• ⚠️ Smart Contract Risk: Code vulnerability risk exists

Pre-minting Preparation

1. Prepare Wallet

Recommended Wallets:

• MetaMask: Most commonly used browser wallet
• Coinbase Wallet: User-friendly mobile wallet
• Ledger/Trezor: Hardware wallets, highest security
• WalletConnect: Supports multiple wallet connections

Network Requirements:

• Ethereum mainnet
• Ensure wallet has sufficient ETH to pay Gas fees

2. Prepare Collateral

Supported Collateral Types:

• ETH: Most commonly used, good liquidity
• WBTC: Wrapped Bitcoin
• USDC: Stablecoin as collateral
• stETH: Staked ETH
• Other Assets: Depending on protocol support

Collateral Requirements:

• Ensure sufficient collateral
• Recommend collateral ratio above 150% (conservative 200%+)
• Reserve Gas fees (ETH)

3. Understand Fee Structure

Fee Explanation:

• Stability Fee: Annual rate, adjusted based on market (usually 1-5%)
• Gas Fees: Ethereum network fees (required for each operation)
• Liquidation Penalties: If liquidated, need to pay penalties (usually 13%)

Fee Examples:

• Minting 10,000 DAI, collateral ratio 150%, stability fee 2%:
  • Stability fee: Approximately 200 DAI/year
  • Gas fees: Approximately $10-50 (depends on network congestion)

Minting Process

Method 1: Through Spark.fi Easy Borrow Flow (Recommended)

Spark.fi provides Easy Borrow Flow, which can complete depositing collateral and borrowing DAI/USDS in one flow, with simple and intuitive operations.

Step 1: Access Spark.fi and Connect Wallet

1. Open your browser and visit Spark.fi
2. Navigate to "Borrow DAI and USDS" page
3. Click "Connect Wallet" in the top right corner
4. Select your wallet type (MetaMask, WalletConnect, Coinbase Wallet, etc.)
5. Confirm connection request in wallet
6. Select Ethereum mainnet (if not automatically selected)

💡 Tip: If you want to borrow other assets (non-DAI/USDS), navigate to "My Portfolio" page and follow steps for depositing assets and borrowing assets.

Step 2: Deposit Collateral

1. Select Collateral Type:

   • Select crypto asset to deposit from dropdown menu in "Deposit" section
   • Supported collaterals include: ETH, WBTC, USDC, stETH, etc.

2. Enter Deposit Amount:

   • Enter collateral amount to deposit in left input field (priced in asset units)
   • Dollar value will be displayed below
   • Confirm amount is correct

3. Add More Collateral (Optional):

   • Click "Add more +" to add more crypto assets as collateral
   • This will generate additional deposit fields where you can select assets and amounts
   • Supports creating positions with multiple collaterals

Step 3: Set Borrowing Parameters

1. Select Asset to Borrow:

   • Select asset to borrow from dropdown menu in "Borrow" section on the right
   • Can choose DAI or USDS

2. Enter Borrow Amount:

   • Enter DAI or USDS amount to borrow in "Borrow" section
   • Or use LTV slider to adjust borrow amount

3. View Position Information:

   • View simulated position status based on current collateral price and borrow amount:
     • Loan to Value (LTV): Percentage of borrow amount relative to collateral value
     • LTV Slider: Shows current LTV percentage and risk level (Conservative/Moderate/Aggressive)
       • Can drag slider to adjust LTV percentage, borrow amount will adjust accordingly
       • Slider also shows liquidation LTV (different collaterals have different liquidation LTVs)
       • When using multiple collaterals, aggregated liquidation LTV based on each collateral amount is used
     • Max LTV: Maximum allowed percentage of borrow amount relative to collateral value
     • Borrow rate: Borrowing annual percentage rate (APR), USDS and DAI rates are set by Sky Governance

⚠️ Important Note: Crypto asset prices fluctuate significantly. Even conservative borrowing positions should be continuously monitored to prevent unnecessary liquidation. Learn more about liquidation here.

💡 Important Note: When you borrow USDS, you're actually borrowing DAI and then upgrading to USDS in the same transaction. This means your debt is DAI and must be repaid using DAI. To repay DAI, you can downgrade USDS to DAI on the Savings page. More information refer to Spark.fi Documentation.

Step 4: View Health Factor and Liquidation Price

1. View Health Factor Overview:
   • After setting borrowing parameters, click "Borrow" button
   • Following information will be displayed:
     • Health Factor: Indicator of how close position is to liquidation
       • Health factor below 1 means position may be liquidated
       • Users are responsible for maintaining health factor above 1 to avoid liquidation
       • Position's LTV may change over time if collateral value changes or debt accumulates due to interest rates
     • Current Price: Shows current market price of collateral asset provided by price oracle
     • Liquidation Price: If collateral asset price reaches this price, position may be liquidated

💡 Note: If you use multiple collateral types, current price and liquidation price information will not be displayed.

Step 5: Complete Transaction

1. Follow Actions Section Instructions:

   • In "Actions" section, you need to click buttons to sign each transaction
   • Must sign each transaction using connected wallet

2. Complete Necessary Transactions:

   • Token Permit/Approval: Must approve collateral token for deposit
   • Deposit: Deposit collateral tokens into borrowing position
   • Borrow: Borrow specified amount of assets

3. Confirm Transactions:

   • Confirm each transaction in wallet
   • Wait for on-chain confirmation (usually minutes)

4. Complete Minting:

   • After all steps completed, you will receive borrowed DAI/USDS in your wallet
   • Confirmation and operation overview will be displayed
   • Can click "View in dashboard" to view your new position

Step 6: Manage Position in My Portfolio

1. View Position:

   • Navigate to "My Portfolio" page
   • View your borrowings in "Borrow" section
   • View your collaterals in "Supply" section

2. Manage Position:

   • Can add collateral, repay debt, withdraw collateral at any time
   • Monitor health factor and liquidation price
   • Adjust position parameters

Managing Positions

Monitor Health Factor and Collateral Ratio

Why It's Important:

• Health Factor too low may trigger liquidation
• Liquidation causes loss of part of collateral (usually 13%)
• Need regular monitoring to avoid liquidation

What is Health Factor:

• Health Factor = 1.0: Reached liquidation threshold
• Health Factor < 1.0: May be liquidated
• Health Factor > 1.5: Relatively safe (equivalent to 150% collateral ratio)
• Health Factor > 2.0: Very safe (equivalent to 200% collateral ratio)

How to Monitor:

1. View in Spark.fi:

   • Access "My Portfolio" page
   • View Health Factor
   • Check collateral ratio and liquidation price
   • Use health factor monitoring tools provided by protocol

2. Use Third-party Tools:

   • DeFiPulse
   • Zapper
   • DeBank
   • Other DeFi monitoring tools

3. Set Price Alerts:

   • Use price alert tools
   • Notify promptly when collateral price drops
   • Adjust collateral ratio or health factor promptly

Add Collateral

When to Add:

• Collateral price drops causing health factor or collateral ratio to decrease
• Want to borrow more DAI/USDS
• Increase safety margin

How to Add:

1. On Spark.fi "My Portfolio" page
2. Find collateral to add in "Supply" section
3. Click "Supply" button
4. Enter amount to add
5. Confirm transaction
6. Wait for on-chain confirmation

Repay Stablecoins

When to Repay:

• Want to redeem collateral
• Reduce debt
• Increase health factor and collateral ratio

How to Repay:

1. On Spark.fi "My Portfolio" page
2. Find asset to repay (DAI or USDS) in "Borrow" section
3. Click "Repay" button
4. Enter amount to repay (or click MAX for full repayment)
5. View health factor changes
6. Confirm transaction
7. Wait for on-chain confirmation

💡 Tip: If you borrowed USDS through Easy Borrow Flow, must repay using DAI. You can downgrade USDS to DAI on Savings page.

Withdraw Collateral

Prerequisites:

• Have repaid sufficient stablecoins
• Health factor still sufficiently high (recommend 1.5+, equivalent to 150% collateral ratio)

How to Withdraw:

1. On Spark.fi "My Portfolio" page
2. Find collateral to withdraw in "Supply" section
3. Click "Withdraw" button
4. Enter amount to withdraw (or click MAX to withdraw all)
5. View health factor after withdrawal
6. Confirm health factor still sufficiently high
7. Confirm transaction
8. Wait for on-chain confirmation

Liquidation Mechanism

What is Liquidation?

When Health Factor falls below 1.0 or collateral ratio falls below protocol's minimum requirement (usually 150%), protocol will automatically liquidate your collateral to repay stablecoin debt. You may lose part of collateral as liquidation penalty.

Liquidation Consequences

Losses:

• Liquidation Penalty: Usually 13% (MakerDAO)
• Gas Fees: Liquidation operations require Gas
• May Lose All Collateral: If market fluctuates dramatically

Example:

• Collateral value: 15,000 USD
• DAI debt: 10,000 DAI
• Collateral ratio: 150% (just meeting minimum requirement)
• If liquidated:
  • Liquidation penalty: Approximately 1,300 USD (13%)
  • Actual loss: Approximately 1,300 USD

How to Avoid Liquidation

1. Maintain Sufficient Health Factor and Collateral Ratio:

   • Recommend maintaining health factor above 1.5 (equivalent to 150% collateral ratio)
   • Conservative users recommend health factor above 2.0 (equivalent to 200% collateral ratio)
   • Don't approach minimum health factor (1.0)

2. Regular Monitoring:

   • Check health factor and collateral ratio at least once daily
   • Use health factor monitoring tools provided by Spark.fi
   • Use third-party monitoring tools to set alerts
   • Monitor market developments

3. Timely Adjustment:

   • Add collateral promptly when collateral price drops
   • Be vigilant during high market volatility
   • Don't wait until approaching liquidation line to act

4. Set Price Alerts:

   • Use price alert tools
   • Notify promptly when collateral price drops to dangerous levels
   • Prepare in advance

Fee Explanation

Stability Fee

What is Stability Fee:

• Annual rate, adjusted based on market
• Usually 1-5%
• Used to maintain DAI/USDS stability

How to Calculate:

• Stability fee = Debt × Stability fee rate
• Example: 10,000 DAI, stability fee rate 2%, annual stability fee = 200 DAI

How to Pay:

• Stability fee accumulates in debt
• Need to pay together when repaying DAI/USDS
• Or cover stability fee by adding collateral

Gas Fees

Gas Fee Explanation:

• Gas fees required for each operation
• Fluctuates based on network congestion
• Usually $10-50 per operation (normal conditions)
• May be $50-200+ during network congestion

How to Reduce Gas Fees:

• Choose times when network is less congested
• Use Gas optimization tools
• Batch operations to reduce transaction count
• Consider using Layer 2 solutions (if protocol supports)

Liquidation Penalties

Liquidation Penalty Explanation:

• If liquidated, need to pay liquidation penalty
• MakerDAO usually 13%
• This is why avoiding liquidation is important

Risk Management

1. Liquidation Risk

Risk Types:

• Collateral price drops
• Health Factor or collateral ratio too low
• High market volatility

Mitigation Strategies:

• Maintain sufficient health factor (recommend 1.5+, equivalent to 150% collateral ratio)
• Regularly monitor health factor and collateral ratio
• Use health factor monitoring tools provided by protocol
• Set price alerts
• Add collateral promptly

2. Smart Contract Risk

Risk Types:

• Code vulnerabilities
• Protocol upgrade risks
• Governance attacks
• Oracle attacks

Mitigation Strategies:

• Choose audited protocols
• Understand protocol's security record
• Don't invest more than you can afford to lose
• Follow protocol announcements and updates

3. Market Risk

Risk Types:

• Collateral price volatility
• Stablecoin de-pegging risk
• Liquidity risk

Mitigation Strategies:

• Diversify investments
• Choose mainstream collaterals
• Monitor market developments
• Maintain sufficient collateral ratio buffer

Best Practices

1. Start Small

   • Recommend small amount testing for first minting (e.g., $1,000-5,000)
   • Increase scale after familiar with process
   • Understand protocol mechanism and risks

2. Maintain Sufficient Health Factor and Collateral Ratio

   • Recommend maintaining health factor above 1.5 (equivalent to 150% collateral ratio)
   • Conservative users recommend health factor above 2.0 (equivalent to 200% collateral ratio)
   • Replenish promptly during market volatility
   • Avoid approaching minimum health factor (1.0)

3. Regular Monitoring

   • Use health factor monitoring tools provided by Spark.fi
   • Access "My Portfolio" page to view health factor
   • Set price alerts
   • Follow protocol announcements and updates
   • Check health factor and collateral ratio at least once daily

4. Understand Protocol Mechanism

   • Read protocol documentation and whitepaper
   • Understand liquidation mechanism and fee structure
   • Follow protocol's security audit reports
   • Participate in community discussions

5. Security First

   • Use hardware wallets (e.g., Ledger, Trezor)
   • Protect seed phrases and private keys
   • Verify website and contract addresses
   • Beware of phishing sites and scams

Frequently Asked Questions

Q: What's the difference between DAI and USDS?

A: DAI is stablecoin issued by MakerDAO, USDS is stablecoin issued by Sky Protocol. Both use the same over-collateralization mechanism, but USDS is the upgraded version of Sky Protocol. You can mint both DAI and USDS using Spark.fi.

Important Note: When you borrow USDS, you're actually borrowing DAI and then upgrading to USDS in the same transaction. This means your debt is DAI and must be repaid using DAI. To repay DAI, you can downgrade USDS to DAI on the Savings page.

Q: What is the minimum collateral ratio? What is Health Factor?

A: MakerDAO and Sky Protocol's minimum collateral ratio is usually 150%, corresponding to health factor of 1.0. Recommend maintaining health factor above 1.5 (equivalent to 150% collateral ratio) to ensure safety, conservative users recommend health factor above 2.0 (equivalent to 200% collateral ratio).

Health Factor Explanation:

• Health Factor = 1.0: Reached liquidation threshold
• Health Factor < 1.0: May be liquidated
• Health Factor > 1.5: Relatively safe (equivalent to 150% collateral ratio)
• Health Factor > 2.0: Very safe (equivalent to 200% collateral ratio)

Q: How are stability fees calculated?

A: Stability fee is an annual rate, adjusted based on market (usually 1-5%). Stability fee accumulates in debt, need to pay together when repaying DAI/USDS.

Q: What happens if liquidated?

A: Protocol will auction your collateral to repay stablecoin debt. You may lose part of collateral as liquidation penalty (usually 13%). This is why avoiding liquidation is important.

Q: Can I redeem collateral anytime?

A: Yes, as long as collateral ratio is sufficient, you can repay stablecoins and redeem collateral at any time. However, note Gas fees and stability fees.

Q: Which collaterals are supported?

A: MakerDAO and Sky Protocol support multiple collaterals including ETH, WBTC, USDC, stETH, etc. You can use single collateral or multiple collaterals to create positions in Spark.fi's Easy Borrow Flow. Please check protocol documentation for specific supported collaterals.

Q: What is LTV (Loan to Value)?

A: LTV is the percentage of borrow amount relative to collateral value. Spark.fi provides LTV slider to adjust borrow amount:

• Conservative: Low LTV, lower risk
• Moderate: Medium LTV, balanced risk and return
• Aggressive: High LTV, higher risk

Different collaterals have different max LTV and liquidation LTV. When using multiple collaterals, aggregated liquidation LTV based on each collateral amount is used.

Security Tips

1. Use Official Channels: Always access the protocol through Spark.fi
2. Check Contract Address: Confirm you're interacting with official contracts
3. Test Small Amounts: When using for the first time, recommend testing with small amounts
4. Protect Private Keys: Never share your private keys or seed phrases
5. Follow Official Announcements: Stay updated on protocol updates and risk alerts
6. Use Hardware Wallets: Improve security, use Ledger or Trezor

Related Resources

Protocol Frontend

• Spark.fi Official Website
• MakerDAO Official Website

MakerDAO Official Documentation

• MakerDAO Documentation
• MakerDAO Developer Documentation
• MakerDAO Whitepaper
• MakerDAO GitHub
• MakerDAO Forum
• MakerDAO Discord

Spark.fi Official Documentation

• Spark.fi Documentation
• Spark.fi Borrow DAI and USDS Guide
• Spark.fi Deposit Assets Guide
• Spark.fi Borrow Assets Guide
• Spark.fi Adjust Position Guide
• Spark.fi Repay Loan Guide
• Spark.fi GitHub

Sky Protocol Resources

• Sky Protocol Documentation
• Sky Protocol GitHub

Other Resources

• Decentralized Minting Overview
• Ethena USDE Minting Tutorial
• Liquity LUSD Minting Guide

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Ready to start minting DAI/USDS? Visit Spark.fi to start your minting journey!